Inflation continues to be the dominant global concern, even in a world of complex geopolitical dynamics that include military conflict in Ukraine, territorial flexing by China, and entrenched societal polarization. We expect the evolution of inflation and commensurate central bank responses to remain the prevailing theme in 2023. While waiting for the wave to break, however, investors must learn to surf.
Given the interplay between inflation and monetary policy, many see a recession as a natural byproduct of tighter financial conditions. History credibly informs such a view, but a US recession may not be a forgone conclusion given a healthy financial system, strong labor demand, and robust private sector. In the Euro area and the UK, heightened sensitivity to external energy supply makes a recession probable, if not already in progress.